Employer vs government parental leave: Labour market effects

A relatively large number of firms in Australia and in the US offer employer-funded parental leave to their employees. We introduce employer-funded parental leave in a theoretical labour search and matching model. Firms choose the duration of paid parental leave offered to prospective employees. Matched firms and workers then negotiate wages through a Nash bargaining process. We show that employer-funded leave allows firms to pay lower wages. In this context, extending government-funded parental leave reduces the benefits of employer-funded leave to firms, reducing total leave duration. It also affects equilibrium wages and employment. We calibrate the model using Australian data. We show that increases in both government-funded leave duration and replacement rate can be welfare improving and, in particular, the welfare effects of government leave duration display an inverted U-shape. •Employers may offer paid parental leave in exchange for lower wages.•Increasing government parental leave reduces the appeal of employer leave to firms.•Government parental leave affects employer leave duration, wages and employment.•We simulate changes in government leave duration and replacement rate in Australia.•The welfare effects of government leave duration display an inverted U-shape.